The Savills Blog

Three reasons why it still makes sense to enter the German real estate market

A zero interest rate policy, strong national economy, projected rental growth – the fundamentals make Germany more attractive than ever. Consequently, investors can and should maintain the confidence to say 'Ja!' to the German market.

Never has so much capital flowed into German commercial real estate and never has property in Germany been as expensive as it is today. The economy and population are growing more dynamically than they have for a long time and the real estate markets are booming, particularly in the major cities. The supply in these markets has been unable to keep pace with demand across most sectors. Consequently, rents have risen sharply and, in some cases, are above their peak levels from the previous cycle with further growth likely.

In other words, the conditions for investors are almost perfect, as they have been for many years. In such an environment, not only are prices high but downside risks are obviously greater than the prospects of further upside. This very situation is particularly challenging for the risk-averse majority of investors. In an environment with almost perfect conditions, risks cannot be avoided even in the core segment. Consequently, more and more investors are asking whether it still makes sense to enter the German real estate market. We say 'yes' for the following three reasons:

In the current world of zero interest rates, to not take risks is costly not only in terms of forgone returns but also in the form of penalty interest from the banks or negative yields (in real terms) from investments in German government bonds. Bonds, it should also be noted, are more expensive than ever. The same is true of equities, with indices printing all-time highs. Compared with other asset classes then, property is not as expensive as it may appear when viewed in isolation.

By investing in German real estate, investors are participating in the productive capital of one of the world’s strongest economies, which also offers a highly stable political environment and a reliable legal framework. The UK, the USA and a few other markets show how this combination of factors is attractive to investors.

Real estate is a long-term investment. Even the current ‘super-cycle’ will come to an end at some point and yields will rise. However, this will only mean losses for investors that sell during that phase. In any case, changes in initial yields are only part of the profit equation. Rents are the other part. These are also currently high but, unlike initial yields, can be fixed for the longer term via leases to produce a stable cash flow. And, who knows, perhaps during the next boom rents will surpass their current record levels. It would not be the first time and would reward those investors that enter the German real estate market now.